Chapter 5 - insurance distribution and insurance intermediaries Flashcards
What is an intermediary?
- link between insurers and consumers
- help identfiy insurance needs, matching those needs with products available
- facilitating insurance contracts to satisfaction of both parties
What are the different delivery systems of insurance within P&C?
1) Independent agency/brokerage system
- pays a commission for each policy broker issues on behalf of the brokers clients
- broken owns client list
2) exclusive agency system
- market policies through exclusive agents who only represent one company
- paid by commission and must pay own expenses
- client list belongs to company
3) direct writing
- deal directly with the public
- employ a force of producers to sell policies
- paid by salary, salary with bonus, salary with commission
- business belongs to insurer
Define broker.
- an independent business person who may place business with a number of insurers
- seeks out clients and finds most beneficial match between client and insurer while meeting clients needs
- usually have an agreement or contract with insurer
Define agent.
- represents only one insurer
- a person authorized by another to act on his or her behalf
Describe a general agent.
One who has authority from a company to:
- manage all of that company’s business within his/her territory
- to appoint other agents
- to settle claims
- usually has charge of the company’s business within a province(s) and is usually referred to as a provincial agenct/provincial manager.
What does a principal and agent relationship include?
1) legal relationship
2) common law
- agents are employed to secure contracts or act for their employers in contractual matters
3) obligations
- places obligations on broker/agent to their insurers and obligations on the insurers to their agents
- also places obligation on each of them toward third parties who enter into negotiations or form a contract
4) authority
- brokers/agents may be authorized to issue policies and settle claims
- may only have authority to solicit applications and submit these to the insurer
In the insurance business, an intermediary may be:
1) Broker - an independent business person who works on behalf of a number of insurers
2) Agent - an independent business person who works exclusively on behalf on one insurer
3) Direct writer - an employee of the insurer
How is an insurance enterprise regulated?
- the authority provided within the Insurance Act of each province and sometimes other legislation
- some provinces agents/brokers are licensed by the government body responsible for insurance
- other provinces brokers are self-regulated and only agents are licensed by the government
- some provinces have insurance councils made of of representatives from insurance industry, government and consumers, who oversee licensing
What is government regulation?
- licensing of persons to be engaged in selling insurance to the public is controlled through provincial insurance regulator.
What is self regulation?
- laws regulating agents/brokers are passed by a provincial government, where control is either passed to:
a) an organization whose members are elected by licensed persons engaged in business of distributing insurance to public
b) have outside representation, as for example, members of consumer groups
What are the four main areas of regulation?
1) qualification
- must write and pass licensing exam based on:
i) knowledge of insurance business
ii) government regulations pertaining to insurance intermediaries
2) licensing
- requirement to operate as an insurance broker/agent
- different levels of licensing
3) operating requirements
- must follow requirements of provincial Insurance Act
4) renewal of license
- annually
- businesses must file periodic returns giving basic details about their operation with licensing body
What are the basic items covered in an agreement?
1) the parties to the agreement
2) classes of business to be written
3) binding authority
- any special instructions or limits must be clearly specified
4) premium collection and credit terms
- who is responsible, when premium must be remitted to insurer, details of type of trust account which premiums are to be held
5) renumeration
- details concerning commissions payable
6) termination
- amount of notice to be given
- liability for accounts due to company
- return of company suppllies
- limit of control or authority on existing policies during run-off period
7) Other, may include:
- direct billing plans
- contingent profit commission
- incentive bonuses
- policy issuance gy agency
- claims handling by agency
What is an express agreement?
- is one in which the terms of arrangement have been specifically stated and agreed to by both parties either orally or in writing
What is an implied contract?
- one in which the parties have acted in such a way that is understood that a principal-agent relationship exists
What is binding authority?
- the capacity to confirm to applicants that they have coverage against certain losses
- may bind insurer to contract of insurance without submitting application to insurer first
What is a binder?
- the confirmation that insurance coverage is in effect
- can be oral or written
- written binder may also be known as a cover note
What are the obligations of the insurer?
1) under the terms of the agency contract the insurer must pay the broker the agreed fee for business
2) some companies agree to assist broker in payment of certain expenses incurred in producing the business
ex) advertising, signs, stationery
What are the obligations of the broker?
1) act within terms of the contract
2) follow instructions as to types of business which may be written
3) collect certain premiums and hold them in a trust account
4) remit premiums collected within specified time limit
5) advise insurer of business written or submit applications promptly
6) advise insurer promptly of all claims notified
7) exercise reasonable care and skill - do not act negligently
8) do not delegate the authority given
How are collection of premiums typically done today?
- insurers offer direct-bill for many if not all classes of insurance
Desribe the use of bank accounts with brokers/agents.
Must have two bank accounts:
1) an insurance trust account in which to deposit premiums collected, and from which to pay insurers for policies issued
2) an operating account which is the general business account
- deposits come from commissions earned and all operating expenses are paid from it
Describe commission.
- the share of the premium allowed to broker/agent for having produced the business
- stated as a percentage of premium (in agreement)
- may vary between different classes of insurance
Describe profit commission.
- an extra commission paid annually to brokers/agents, but only if the business placed by them produced a certain level of profitability for the insurer
What 3 forms can a independent insurance agency/brokerage organization organize itself as?
1) sole proprietorshop
2) partnership
3) corporation
How is an intermediary required to operate?
1) within the scope of the contract with the insurer
2) within the authority of his or her license
What is the first priority of producers and what is it dependent upon?
PRODUCTION
1) product knowledge
- continuing education
- acquire hours to maintain RIBO
2) product target
- setting realistic goals to motivate individuals
3) prospecting and selling
- loss for and attract new business
4) time control (time management)
- producer needs to allocate time to perform all functions
5) curiosity
- take interest in other people’s business promotes research
What is the second priority to producers and what is it dependant upon?
SERVICE (aka customer satisfaction)
1) good product knowledge and adequate market
- components of good customer service
2) retaining customers at renewal
3) claims handling
- promptly notifying/ reporting insurer if a loss occurs
- monitor process of claim
